PART 3/3: Building a Culture of Ethics and Integrity with D&O’s

This post is the last in a three-part series on how corporations can manage conflicts of interest with Directors and Officers and deals with building a culture of ethics. The importance of having a thorough conflict of interest management plan in place is clear from the legal and non-legal implications of failing to declare a conflict. The cornerstone of a comprehensive plan is establishing a Conflict of Interest Code.

Today, I’ll provide an overview of three complementary steps that will solidify understanding of the Conflict of Interest Code and ensure regular opportunities are made available to D&Os to disclose.

D&O Training

Training is essential to building a culture of ethics. Every director and officer should be required to undertake an orientation program when they first join a Board or corporation which should include training on conflicts of interest and which should review of the conflicts of interest code. Without this introduction to the code, corporations should expect D&O compliance with the code will be a challenge.

Annual Conflict of Interest Statement

D&O’s should be required to complete a confidential disclosure report upon assuming office. This report requires the disclosure of financial interests in third parties, other directorship activities, and other interests or activities with third parties. D&Os should be required to file a conflict of interest statement every year during their service to ensure the information is updated regularly and to ensure the need to disclose conflicts of interests stays top of mind.

There is also an obligation on the individual director or officer to update this document whenever there is any change to the information it contains. The document should be signed by the director or officer and provided to the corporate secretary.

This annual disclosure serves a few purposes:

  1. It reminds directors and officers of their continuing obligation to disclose conflicts.
  2. It acts as a proactive disclosure to the corporation that may lead to the early identification of actual, apparent, and potential conflicts associated with these outside interests.

Note: Directors and officers should be reminded that the corporation’s failure to react to these annual disclosures does not absolve directors and officers from taking necessary steps to disclose and avoid conflicts involving these third party interests.

In-Meeting Conflict Disclosures

The posts have lightly touched on this already but it bears repeating given that so many Boards fail to get this. Where a conflict relates to a matter to be decided at a Board meeting (normally in connection with a contract approval), the director or officer should inform the full board of the conflict at the start of the meeting and the disclosure should be documented in the minutes. This step should be taken in addition to early disclosure of the conflict outside any Board meeting.

It is a best practice for the director or officer to leave the room during the discussion and voting to avoid any outside perception of undue influence by the conflicted individual. The director’s absence from the meeting for the discussion and decision on the matter should be noted in the minutes.

Implementing a sound D&O conflict of interest management program which includes a code, a confidential disclosure process, access to legal expertise, D&O training and annual refreshers, will promote a strong culture of ethics inside the organization. This will, in turn, ensure the credibility, integrity, and overall authority of the Board through the corporation and its stakeholders.

*****

This is the third post in a three-part series on Director & Officer Conflicts of Interest:
Part 1: Managing Director & Officer Conflicts of Interest
Part 2: Establishing a D&O Conflict of Interest Code
Part 3: Building a Culture of Ethics and Integrity with D&O’s

This post originally appeared on the RIZEN Business Lawyers Alliance blog.